TITLE IV--STUDENT ASSISTANCE

Part B--Federal Family Education Loan Program

SEC. 413. GUARANTY AGENCY REFORMS

(a) FEDERAL STUDENT LOAN RESERVE FUND- Part B of title IV is amended by inserting after section 422 (20 U.S.C. 1072) the following new section:

`SEC. 422A. FEDERAL STUDENT LOAN RESERVE FUND.

`(a) ESTABLISHMENT- Each guaranty agency shall, not later than 60 days after the date of enactment of this section, deposit all funds, securities, and other liquid assets contained in the reserve fund established pursuant to section 422 into a Federal Student Loan Reserve Fund (in this section and section 422B referred to as the `Federal Fund'), which shall be an account of a type selected by the agency, with the approval of the Secretary.

`(b) INVESTMENT OF FUNDS- Funds transferred to the Federal Fund shall be invested in obligations issued or guaranteed by the United States or a State, or in other similarly low-risk securities selected by the guaranty agency, with the approval of the Secretary. Earnings from the Federal Fund shall be the sole property of the Federal Government.

`(c) ADDITIONAL DEPOSITS- After the establishment of the Federal Fund, a guaranty agency shall deposit into the Federal Fund--

`(1) all amounts received from the Secretary as payment of reinsurance on loans pursuant to section 428(c)(1);

`(2) from amounts collected on behalf of the obligation of a defaulted borrower, a percentage amount equal to the complement of the reinsurance percentage in effect when payment under the guaranty agreement was made--

`(A) with respect to the defaulted loan pursuant to sections 428(c)(6)(A) and 428F(a)(1)(B); and

`(B) with respect to a loan that the Secretary has repaid or discharged under section 437;

`(4) all amounts received from the Secretary as payment for supplemental preclaims activity performed prior to the date of enactment of this section;

`(5) 70 percent of amounts received after such date of enactment from the Secretary as payment for administrative cost allowances for loans upon which insurance was issued prior to such date of enactment; and

`(6) other receipts as specified in regulations of the Secretary.

`(d) USES OF FUNDS- Subject to subsection (f), the Federal Fund may only be used by a guaranty agency--

`(2) to pay into the Agency Operating Fund established pursuant to section 422B (in this section and section 422B referred to as the `Operating Fund') a default aversion fee in accordance with section 428(l).

`(e) OWNERSHIP OF FEDERAL FUND- The Federal Fund, and any nonliquid asset (such as a building or equipment) developed or purchased by the guaranty agency in whole or in part with Federal reserve funds, regardless of who holds or controls the Federal reserve funds or such asset, shall be considered to be the property of the United States, prorated based on the percentage of such asset developed or purchased with Federal reserve funds, which property shall be used in the operation of the program authorized by this part, as provided in subsection (d). The Secretary may restrict or regulate the use of such asset only to the extent necessary to reasonably protect the Secretary's prorated share of the value of such asset. The Secretary may direct a guaranty agency, or such agency's officers or directors, to cease any activity involving expenditures, use, or transfer of the Federal Fund administered by the guaranty agency that the Secretary determines is a misapplication, misuse, or improper expenditure of the Federal Fund or the Secretary's share of such asset.

`(f) TRANSITION-

`(1) IN GENERAL- In order to establish the Operating Fund, each guaranty agency may transfer not more than 180 days' cash expenses for normal operating expenses (not including claim payments) as a working capital reserve as defined in Office of Management and Budget Circular A-87 (Cost Accounting Standards) from the Federal Fund for deposit into the Operating Fund for use in the performance of the guaranty agency's duties under this part. Such transfers may occur during the first 3 years following the establishment of the Operating Fund. However, no agency may transfer in excess of 45 percent of the balance, as of September 30, 1998, of the agency's Federal Fund to the agency's Operating Fund during such 3-year period. In determining the amount that may be transferred, the agency shall ensure that sufficient funds remain in the Federal Fund to pay lender claims within the required time periods and to meet the reserve recall requirements of this section and subsections (h) and (i) of section 422.

`(2) SPECIAL RULE- A limited number of guaranty agencies may transfer interest earned on the Federal Fund to the Operating Fund during the first 3 years after the date of enactment of this section if the guaranty agency demonstrates to the Secretary that--

`(A) the cash flow in the Operating Fund will be negative without the transfer of such interest; and

`(B) the transfer of such interest will substantially improve the financial circumstances of the guaranty agency.

`(3) REPAYMENT PROVISIONS- Each guaranty agency shall begin repayment of sums transferred pursuant to this subsection not later than the start of the fourth year after the establishment of the Operating Fund, and shall repay all amounts transferred not later than 5 years from the date of the establishment of the Operating Fund. With respect to amounts transferred from the Federal Fund, the guaranty agency shall not be required to repay any interest on the funds transferred and subsequently repaid. The guaranty agency shall provide to the Secretary a reasonable schedule for repayment of the sums transferred and an annual financial analysis demonstrating the agency's ability to comply with the schedule and repay all outstanding sums transferred.

`(4) PROHIBITION- If a guaranty agency transfers funds from the Federal Fund in accordance with this section, and fails to make scheduled repayments to the Federal Fund, the agency may not receive any other funds under this part until the Secretary determines that the agency has made such repayments. The Secretary shall pay to the guaranty agency any funds withheld in accordance with this paragraph immediately upon making the determination that the guaranty agency has made all such repayments.

`(5) WAIVER- The Secretary may--

`(A) waive the requirements of paragraph (3), but only with respect to repayment of interest that was transferred in accordance with paragraph (2); and

`(B) waive paragraph (4);

for a guaranty agency, if the Secretary determines that there are extenuating circumstances (such as State constitutional prohibitions) beyond the control of the agency that justify such a waiver.

`(6) EXTENSION OF REPAYMENT PERIOD FOR INTEREST-

`(A) EXTENSION PERMITTED- The Secretary shall extend the period for repayment of interest that was transferred in accordance with paragraph (2) from 2 years to 5 years if the Secretary determines that--

`(i) the cash flow of the Operating Fund will be negative as a result of repayment as required by paragraph (3);

`(ii) the repayment of the interest transferred will substantially diminish the financial circumstances of the guaranty agency; and

`(iii) the guaranty agency has demonstrated--

`(I) that the agency is able to repay all transferred funds by the end of the 8th year following the date of establishment of the Operating Fund; and

`(II) that the agency will be financially sound on the completion of repayment.

`(B) REPAYMENT OF INCOME ON TRANSFERRED FUNDS- All repayments made to the Federal Fund during the 6th, 7th, and 8th years following the establishment of the Operating Fund of interest that was transferred shall include the sums transferred plus any income earned from the investment of the sums transferred after the 5th year.

`(7) INVESTMENT OF FEDERAL FUNDS- Funds transferred from the Federal Fund to the Operating Fund for operating expenses shall be invested in obligations issued or guaranteed by the United States or a State, or in other similarly low-risk securities selected by the guaranty agency, with the approval of the Secretary.

`(8) SPECIAL RULE- In calculating the minimum reserve level required by section 428(c)(9)(A), the Secretary shall include all amounts owed to the Federal Fund by the guaranty agency in the calculation.'.

(b) AGENCY OPERATING FUND ESTABLISHED- Part B of title IV is further amended by inserting after section 422A (as added by subsection (a)) the following new section:

`SEC. 422B. AGENCY OPERATING FUND.

`(a) ESTABLISHMENT- Each guaranty agency shall, not later than 60 days after the date of enactment of this section, establish a fund designated as the Operating Fund.

`(b) INVESTMENT OF FUNDS- Funds deposited into the Operating Fund shall be invested at the discretion of the guaranty agency in accordance with prudent investor standards.

`(c) ADDITIONAL DEPOSITS- After the establishment of the Operating Fund, the guaranty agency shall deposit into the Operating Fund--

`(1) the loan processing and issuance fee paid by the Secretary pursuant to section 428(f);

`(2) 30 percent of amounts received after the date of enactment of this section from the Secretary as payment for administrative cost allowances for loans upon which insurance was issued prior to such date of enactment;

`(3) the account maintenance fee paid by the Secretary in accordance with section 458;

`(4) the default aversion fee paid in accordance with section 428(l);

`(5) amounts remaining pursuant to section 428(c)(6)(B) from collection on defaulted loans held by the agency, after payment of the Secretary's equitable share, excluding amounts deposited in the Federal Fund pursuant to section 422A(c)(2); and

`(6) other receipts as specified in regulations of the Secretary.

`(d) USES OF FUNDS-

`(1) IN GENERAL- Funds in the Operating Fund shall be used for application processing, loan disbursement, enrollment and repayment status management, default aversion activities (including those described in section 422(h)(8)), default collection activities, school and lender training, financial aid awareness and related outreach activities, compliance monitoring, and other student financial aid related activities, as selected by the guaranty agency.

`(2) SPECIAL RULE- The guaranty agency may, in the agency's discretion, transfer funds from the Operating Fund to the Federal Fund for use pursuant to section 422A. Such transfer shall be irrevocable, and any funds so transferred shall become the sole property of the United States.

`(3) DEFINITIONS- For purposes of this subsection:

`(A) DEFAULT COLLECTION ACTIVITIES- The term `default collection activities' means activities of a guaranty agency that are directly related to the collection of the loan on which a default claim has been paid to the participating lender, including the due diligence activities required pursuant to regulations of the Secretary.

`(B) DEFAULT AVERSION ACTIVITIES- The term `default aversion activities' means activities of a guaranty agency that are directly related to providing collection assistance to the lender on a delinquent loan, prior to the loan's being legally in a default status, including due diligence activities required pursuant to regulations of the Secretary.

`(C) ENROLLMENT AND REPAYMENT STATUS MANAGEMENT- The term `enrollment and repayment status management' means activities of a guaranty agency that are directly related to ascertaining the student's enrollment status, including prompt notification to the lender of such status, an audit of the note or written agreement to determine if the provisions of that note or agreement are consistent with the records of the guaranty agency as to the principal amount of the loan guaranteed, and an examination of the note or agreement to assure that the repayment provisions are consistent with the provisions of this part.

`(e) OWNERSHIP AND REGULATION OF OPERATING FUND-

`(1) OWNERSHIP- The Operating Fund, with the exception of funds transferred from the Federal Fund in accordance with section 422A(f), shall be considered to be the property of the guaranty agency.

`(2) REGULATION- Except as provided in paragraph (3), the Secretary may not regulate the uses or expenditure of moneys in the Operating Fund, but the Secretary may require such necessary reports and audits as provided in section 428(b)(2).

`(3) EXCEPTION- Notwithstanding paragraphs (1) and (2), during any period in which funds are owed to the Federal Fund as a result of transfer under section 422A(f)--

`(A) moneys in the Operating Fund may only be used for expenses related to the student loan programs authorized under this part; and

`(B) the Secretary may regulate the uses or expenditure of moneys in the Operating Fund.'.